Lecture 05 Mechanism of Trading and Other Organization

8/13/2019 Lecture 05 Mechanism of Trading and Other Organization

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Primary Market (IPO)

Secondary Market (Organized Markets)

Third Market (OTC)

Fourth Market



An initial public offering (IPO) or stock marketlaunch is a type of public offering whereshares of a company are sold to the generalpublic for the first time.

IPOs are often issued by smaller, youngercompanies seeking the capital to expand

But can also be done by large privately owned

companies looking to become publicly traded Publicly traded companies seeking to start a

new project.



Initial public offerings are used by companiesto raise expansion capital, topossibly monetize the investments of earlyprivate investors, and to become publicly

traded enterprises.

A company selling shares is never required torepay the capital to its public investors.

Advantage of IPO is that company would beable to generate large amount of funds fromthe general public.



Advantages could be◦ Enlarging and diversifying equity base

◦ Enabling cheaper access to capital

◦ Increasing exposure, prestige, and public image

◦ Attracting and retaining better management andemployees through liquid equity participation

◦ Facilitating acquisitions (potentially in return forshares of stock)

◦

Creating multiple financing opportunities: equity,convertible debt, cheaper bank loans, etc.



Disadvantages could be◦ Significant legal, accounting and marketing costs,

many of which are ongoing◦ Requirement to disclose financial and business

information◦ Meaningful time, effort and attention required of

senior management◦ Risk that required funding will not be raised◦ Public dissemination of information which may be

useful to competitors, suppliers and customers.◦ Loss of control and stronger agency problems due

to new shareholders



Dutch Auction Investment Banker

Underwriter / Underwriting syndicate

Prospectus Underwriters provide several services,

including help with correctly assessing thevalue of shares (share price), and establishing

a public market for shares (initial sale). Who can be the underwriter?



Green shoe option Eating Stock

Shelf rule / Shelf registration



A broker is an intermediary who has a license tobuy and sell securities on a client's behalf.Stockbrokers coordinate contracts between

buyers and sellers, usually for a commission. A market maker, on the other hand, is an

intermediary that is willing and ready to buy andsell securities for a profitable price.

Bid price is the price on which the dealer wishesto buy shares

Ask price is the price on which the dealer wishesto sell shares

Market maker or dealer is also a broker.

Investors should make sure that there is a clearseparation between a broker and a marketmaker.



Blue chip stocks are the stocks of a companywith good record of earnings and dividendspayouts.

The blue chip companies are well known bythe investors.

Brokerage firms earn commissions on

executed trades, sales loads on mutual funds,profits from securities sold from inventory,underwriting fees and administrative accountfees

Full service broker Discount broker











Market order

Limit order

Stop order

Specific order



Central Depository Company (CDC)Account

Central Depository Company of

Pakistan Limited (CDC) provides custodial services for shares.

It ensures efficient handling and

transfer of shares.



Types of CDC Accounts

Main Account for Brokers ( a gatewayaccount)

House Account (a family account of theBroker)

Sub-Account (An investor account with CDCthrough Broker)



An individual investor can also open a CDCAccount.

Investor Account Services. (Facilitating theInvestors to open their independent CDCAccounts)

Initial Account Opening Fee: Rs.500/-

Annual renewal Fee Rs.500/-







Earlier it was Badla Financing byvarious private investors.

Due to the crash in financial

markets of Pakistan the marginalfinancing is adopted.

To secure the risk of the investorsas well as the risk of the brokers.



In finance, a margin is collateral that theholder of a financial instrument has todeposit to cover some or all of the creditrisk of their counterparty (most often

their broker or an exchange). This risk can arise if the holder has done any

of the following:◦ Borrowed cash from the counterparty to buy

financial instruments

◦ Sold financial instruments short



You are advised to study the existingCorporate structure of NCCP CDC and StockExchange. Write about one page on each ofthe organization and also draw flow diagrams

if necessary

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Lecture 05 Mechanism of Trading and Other Organization